Wacky Backy Games

byCraig WelchonMay 24, 2016

The release last week of a previously unpublished tribunal ruling against Philip Morris, the tobacco company that had raised a dispute against Australia was, for that course of action, the end of the game. But it produced a great deal of commentary on plain packaging of tobacco products, the dispute system itself, (ISDS) 1, and the trade agreements under which ISDS operates.

Background

In 2011 the Australian Government legislated to force tobacco product manufacturers to adhere to packaging that disallowed advertising and brand differentiation (‘plain packaging’ legislation). 2 The day that the legislation was effected, Philip Morris joined a High Court action against the Government, claiming that IP 3 rights had been breached, in that the legislation was a form of expropriation. The next year, the case was decided against the tobacco companies 4.

Some six months prior to the enactment of the legislation, Philip Morris gave notice of an Investor-State Dispute Settlement (ISDS) dispute. This was under the provisions of the Australia – Hong Kong Bilateral Investment Treaty (BIT), which was signed in 1993.

ISDS provisions are common, being included in recent Australian agreements with Korea, China and the Trans-Pacific Partnership Agreement (TPP). The ISDS clause is contentious. The Howard Government refused to have it in the Australia – United States Free Trade Agreement (AUSFTA), but the Abbott Government agreed to it in the TPP. The agreements with China and Korea do include ISDS, but that with Japan does not.

Originally intended to protect investors in countries where the justice systems might not be up to par and investments possibly at risk of expropriation or other penalties, the ISDS system has changed. From protecting first-world investors from calamities in third-world countries, it has become a battleground from one advanced country to another. A typical example is that under NAFTA 6 US companies have raised disputes against Canada and been successful more than a dozen times. No dispute against the United States has ever been successful, although in the author’s view that might change when a dispute recently raised by TransCanada relating to the denial of approval for its Keystone XL pipeline is heard.

The Dispute

Lodging the dispute under the Hong Kong BIT was a surprising move, and took place as a result of some corporate juggling, often known as ‘forum shopping’. Philip Morris engaged in some corporate re-structuring, such that its Hong Kong entity 7 became the owner of the IP assets that it claimed had been expropriated by the Australian Government.

Bifurcation

Because of the concerns about the validity of the re-structure; and the timing of the claim versus the timing of the legislation and the Government’s stated intent to proceed with the legislation, the Australian Government successfully moved to bifurcate the proceedings. That is, there would be two stages to the proceedings. A ruling on whether Philip Morris was actually a defined ‘Investor’ when it re-structured, and whether the tribunal had jurisdiction to hear the matter, would be held first. If that ruling favoured Philip Morris, a subsequent hearing would consider the facts of the matter (had there been uncompensated expropriation?).

Ruling

The decision did not mince words. It was found that Philip Morris had engaged in games for the sake of bringing the dispute under the Hong Kong – Australia BIT, knowing that it could not be brought under the Australia – US FTA.

In light of the foregoing discussion, the Tribunal cannot but conclude that the initiation of this arbitration constitutes an abuse of rights, as the corporate restructuring by which the Claimant acquired the Australian subsidiaries occurred at a time when there was a reasonable prospect that the dispute would materialise and as it was carried out for the principal, if not sole, purpose of gaining Treaty protection. Accordingly, the claims raised in this arbitration are inadmissible and the Tribunal is precluded from exercising jurisdiction over this dispute.

Misinformation

Returning to Catherine King’s tweet, which is representative of many, let’s consider if it was ‘a great result for Australia’ and ‘another international endorsement of Labor’s plain packaging policy’.

The former is certainly true. Australia legislated in the interests of public health, and the efforts of a tobacco company to overturn that legislation, or win a cash award in lieu, have failed.

Endorsement of policy? Not at all. The Tribunal did not consider Labor’s policy (more correctly the Australian Government’s policy) at all. In fact the judgment makes not a single mention of health policy, and quite a few references to investment policy.

Apart from the decision being held in an arbitration tribunal, not a court, the ‘bid to sue Australia’ was not secret. It was widely publicised at the time that it was launched, and followed by the press, academics and other interested parties.

The article goes on to refer to the

heavily redacted 186-page ruling

The judgment was not heavily redacted at all. It was lightly redacted, and the redactions were, quite properly, primarily confidential legal advice given to Philip Morris. The reasons for the judgment were given in full, with extensive detail. It is not possible to read the judgment and not know exactly what had transpired.

The single most quoted newspaper article (in Australia) on the release of the judgment was that by Peter Martin in the Fairfax press.

The headline is reasonable:

Australia versus Philip Morris. How we took on big tobacco and won

He goes on to say:

Its use of an outside tribunal rather than an Australian court to sue the government was unusual, in that it was making use of a provision available to foreign companies under trade agreements but denied to Australian companies.

This is misleading. Every treaty that Australia has signed that includes an ISDS provision allows Australian investors, if they believe that the investment country has breached the agreement, to sue that government – in exactly the same way that investors from that country can sue the Australian Government.

Then we read:

The government spent more than $50 million defending the case …

With a link to – an article of his own, from July 2015. There is no proof, no quote from a Government source. Without any attribution it can only be treated as supposition. This figure then took on a life of its own, being quoted by Dr Margaret Chan, Director-General of the World Health Organization, in a lecture at Georgetown University’s Global Futures Initiative on 30th September 2015.

To date, Australia has spent nearly $50 million defending its right to introduce plain packaging.

Since that time Dr Chan has been often quoted as an authoritative source. Perhaps her researcher just looked at Peter Martin’s article. I’m not denying that the figure might be correct. I’m criticising its continued use without an authoritative source.

Summary

This was a good result for public health. But the whole topic of ISDS is riddled with conjecture, myth and unfounded opinion. This will be explored in further blog entries. Part 2 of Wacky Backy Games will look at ‘Regulatory Chill’ as well as the TPP ‘tobacco carve-out’.

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ISDS: Investor-State Dispute Settlement

Tobacco Plain Packaging Act 2011 (Cth)

IP: Intellectual Property

There was no property of the kind specified in § 51(xxxi) of the Australian Constitution